1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal quarter ended: March 31, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number: 0-25012
CENSTOR CORP.
(Exact name of registrant as specified in its charter)
California 94-2775712
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
540 N. Santa Cruz Ave., Suite #277
Los Gatos, California 95030
(address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (408) 298-8400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MARCH 31, 1998
Common Stock - no par value 8,523,751
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CENSTOR CORP.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 1997 and March 31, 1998 (unaudited) 3
Condensed Consolidated Statements of Operations (unaudited)
three and nine months ended March 31, 1997 and 1998 4
Condensed Consolidated Statements of Cash Flows (unaudited)
nine months ended March 31, 1997 and 1998 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 10
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENSTOR CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, MARCH 31,
ASSETS 1997 1998
------------- -------------
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 799,928 $ 1,100,546
Receivables and prepaid expenses 44,537 19,266
------------- -------------
Total current assets 844,465 1,119,812
Deposits and other assets 10,516 4,481
------------- -------------
Total assets $ 854,981 $ 1,124,293
============= =============
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Accounts payable $ 66,372 $ 60,852
Deferred revenue 1,583,333 1,333,333
Other current liabilities 139,075 88,671
------------- -------------
Total current liabilities 1,788,780 1,482,856
Long-term obligations:
Deferred revenue 5,333,335 4,333,336
Restructured debt obligation 12,679,377 12,679,377
Net capital deficiency:
Preferred stock 32,509,031 32,509,031
Common stock 50,241,660 50,230,850
Warrants to purchase shares of preferred stock 253,050 253,050
Capital surplus 2,263,708 2,263,708
Accumulated deficit (104,203,150) (102,627,915)
------------- -------------
(18,935,701) (17,371,276)
Notes receivable from shareholders (10,810) --
------------- -------------
Net capital deficiency (18,946,511) (17,371,276)
------------- -------------
Total liabilities and net capital deficiency $ 854,981 $ 1,124,293
============= =============
See accompanying notes to condensed consolidated financial statements.
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CENSTOR CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- ----------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
Revenues - license fees $ 1,083,333 $ 333,333 $ 3,004,999 $ 2,749,999
Costs and expenses:
Selling, general, and administrative 453,864 277,085 1,471,106 1,042,159
----------- ----------- ----------- -----------
Total expenses 453,864 277,085 1,471,106 1,042,159
----------- ----------- ----------- -----------
Operating income 629,469 56,248 1,533,893 1,707,840
Interest and other income (expense), net (11,429) 5,112 1,477,828 17,395
----------- ----------- ----------- -----------
Income before income tax expense 618,040 61,360 3,011,721 1,725,236
Income tax expense 18,333 -- 68,333 150,000
----------- ----------- ----------- -----------
Net income $ 599,707 $ 61,360 $ 2,943,388 $ 1,575,235
=========== =========== =========== ===========
Basic net income per share $ 0.06 $ 0.01 $ 0.32 $ 0.18
=========== =========== =========== ===========
Diluted net income per share $ 0.02 $ 0.00 $ 0.12 $ 0.07
=========== =========== =========== ===========
Shares used in basic calculation (in thousands): 9,303 8,524 9,303 8,525
=========== =========== =========== ===========
Shares used in diluted calculation (in thousands): 24,291 23,512 24,291 23,513
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
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CENSTOR CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
MARCH 31,
-----------------------------
1997 1998
----------- -----------
Operating activities:
Net income $ 2,943,388 $ 1,575,235
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 16,655 6,035
Gain on transfer of research and development operation (1,596,706) --
Interest on subordinated debentures 191,066 --
Changes in assets and liabilities:
Receivables and prepaid expenses (1,664,593) 25,271
Accounts payable (659,720) (5,520)
Deferred revenue 5,000,001 (1,249,999)
Other current liabilities (411,929) (50,404)
----------- -----------
874,774 (1,274,617)
----------- -----------
Net cash provided by operating activities 3,818,162 300,618
Investing activities:
Deposits and other assets 122,220 --
Proceeds from sale of fixed assets and transfer of assembled workforce 1,025,000 --
----------- -----------
Net cash provided by investing activities 1,147,220 --
----------- -----------
Financing activities:
Proceeds from issuance of short-term debt 350,000 --
Principal payments of short- and long-term debt (5,447,920) --
Principal payments under capital leases (23,825) --
Release of certificate of deposit in connection 94,450 --
with leases
----------- -----------
Net cash used in financing activities (5,027,295) --
----------- -----------
Net increase (decrease) in cash and cash equivalents (61,913) 300,618
Cash and cash equivalents at beginning of period 199,998 799,928
----------- -----------
Cash and cash equivalents at end of period $ 138,085 $ 1,100,546
=========== ===========
Supplemental disclosure of noncash financing activities:
Conversion of note payable to license $ 3,000,000 $ --
Assignment of leases in connection with sale of assets $ 584,018 $ --
Cancellation of shareholder notes receivable $ -- $ 10,810
See accompanying notes to condensed consolidated financial statements.
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CENSTOR CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
NOTE 1 -- BASIS OF PRESENTATION AND BUSINESS ACTIVITIES:
The accompanying unaudited condensed consolidated financial statements
have been prepared by Censtor Corp. ("Censtor" or the "Company") in accordance
with generally accepted accounting principles for interim financial information,
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for annual consolidated financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the nine months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the full year
ended June 30, 1998. The financial information presented herein should be read
in conjunction with the Company's audited consolidated financial statements and
notes thereto for the year ended June 30, 1997 included in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission.
During this fiscal period, the employment of four of the remaining five
employees of the Company was terminated. The one remaining employee is
responsible for the finance and administrative duties for the Company while
outside sources will be utilized for the Company's intellectual property
management duties. One of these companies is I. P. Managers, Inc. ("IPM"). IPM
has relationships with intellectual property law firms that will provide legal
services. IPM also specializes in consulting and expert witness services to the
legal profession.
NOTE 2 -- NET INCOME PER SHARE:
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ------------------
1997 1998 1997 1998
------ ------ ------ ------
Denominator for basic earnings per share -
weighted average shares 9,303 8,524 9,303 8,525
Effect of dilutive securities:
Convertible preferred stock 14,988 14,988 14,988 14,988
------ ------ ------ ------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions 24,291 23,512 24,291 23,513
====== ====== ====== ======
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NOTE 3 -- INCOME TAXES:
The Company has recorded an income tax expense of $150,000 for the nine
months ended March 31, 1998, relating to the 10% Japanese withholding tax on the
sale of a license. The Company recorded income tax expense of $68,000 for the
quarter ended March 31, 1997 reflecting the Company's estimate of its potential
alternative minimum tax liability on earnings for the nine months ended March
31, 1997.
NOTE 4 -- LICENSE ARRANGEMENTS:
On September 25, 1997, the Company entered into a licensing arrangement
with TDK Corporation, a Japanese component manufacturer, to license its
technology. The Company received a nonrefundable payment of $1.5 million on
September 26, 1997. This payment was subject to a 10% withholding tax by the
Japanese authorities. Under the terms of the Representation Agreement between
Censtor and IPM, the Company paid IPM a commission of ten percent of the net
payment received by Censtor from TDK. One of the directors of the Company is
also an officer and director of IPM.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following contains projections or other forward-looking statements
regarding future events or the future financial performance of Censtor Corp.
("Censtor" or the "Company"), including statements related to Censtor's 1998
operating plans, sale of licenses by the Company and future Censtor operating
expenses and cash flows. Actual events or results may differ materially as a
result of risks and uncertainties, including those set forth in documents the
Company files from time to time with the Securities and Exchange Commission,
including the Company's last filed Form 10-K and Form 10-Q.
In the following discussion and analysis, forward-looking statements
are made in the Overview, Liquidity and Capital Resources, and Results of
Operations sections.
OVERVIEW
The Company was formed in 1981 to develop perpendicular recording
technology and to manufacture head and disk components for disk drives. The
Company subsequently shifted the focus of its development efforts from
perpendicular to longitudinal contact recording technology. To date, the
Company's principal source of revenue has been license fees from disk drive
manufacturers. While the Company's license agreements typically provide for
on-going royalty payments by licensees based upon sales of products
incorporating the Company's technology, to date none of the Company's licensees
has commercialized products using the Company's technology and the Company has
received no recurring royalty revenue. Until the first quarter of fiscal 1997,
the Company had not been profitable in any fiscal period since inception, and,
as of March 31, 1998, had an accumulated deficit of $102.6 million. There can be
no assurance that the Company will be able to sustain its recent profitability
of the last year or achieve or sustain significant revenues or profitability in
the future.
Censtor's operating plans for fiscal 1998 focus on the perfection of
the Company's patent protection and other proprietary rights and the possible
exploitation of such rights through licenses or other strategic transactions
with disk drive manufacturers and other related companies. The Company expects
to finance these operations through sales of additional licenses such as the one
entered into between the Company and TDK Corporation ("TDK") in September 1997.
There can be no assurance that the Company will be able to sustain its
operations beyond 1998 without the sale of such additional licenses.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through private placements of its equity and debt securities and, to a lesser
extent, through licensing and research and development agreements.
During the nine months ended March 31, 1998, the Company did not engage
in any financing or investing activities. In comparison, in the nine months
ended March 31, 1997, the Company used net cash from financing activities of
$5.0 million, primarily for the repayment of $5.4 million on notes payable. The
Company generated cash from investing activities of $1.1 million in the nine
months ended March 31, 1997 from sale of certain assets and the transfer of its
workforce to Read-Rite Corporation ("Read-Rite"). During the nine months ended
March 31, 1998, the Company generated cash in its operations of $301,000,
primarily from the sale of a license, offset by operating expenses. The Company
generated cash in its operations of $3.8 million in the nine months ended March
31, 1997, primarily from the receipt of $5.8 million of license fees from
Read-Rite, a significant portion of which was recorded as deferred revenue
offset by operating expenses and changes in operating net assets. As of March
31, 1998, the Company had negative working capital of approximately $363,000.
The Company's ability to fund its cash requirements and assert its
intellectual property rights in the future depends largely upon its success in
seeking new licensees. The Company believes the cash received from the license
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agreement with TDK will enable it to fund its planned operations through
calendar 1998. The Company's commitments for cash payments in calendar year 1998
are primarily for operating expenses, which, going forward, may include
significant litigation expense related to exploitation of the Company's
intellectual property rights through licensing or other strategic transactions
with disk drive manufacturers or other companies.
RESULTS OF OPERATIONS
Revenues
The Company's major revenue source has been fees from the sale of
license agreements with disk drive manufacturers. Revenue for the three and nine
month periods ended March 31, 1998 was $333,000 and $2.7 million, respectively,
relating to the recognition of deferred revenue associated with certain licenses
to Read-Rite and to Western Digital Corp. ("WD") entered into during the first
quarter of fiscal 1997 and the new license with TDK entered into in September
1997. Revenues of $1.1 million and $3.0 million for the quarter and nine months
ended March 31, 1997, respectively, related to the recognition of deferred
revenues associated with the licenses sold to Read-Rite and WD.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased from $454,000
for the quarter ended March 31, 1997 to $277,000 in the quarter ended March 31,
1998 and from $1.5 million for the nine month period ended March 31, 1997 to
$1.0 million for the corresponding period this year. These decreases were
largely the result of lower headcount.
Interest and Other Income, Net
For the nine month period ended March 31, 1997, interest and other
income, net, included a gain of $1.6 million relating to the transaction with
Read-Rite.
Income Taxes
The Company has recorded an income tax expense of $150,000 for the nine
months ended March 31, 1998, relating to the 10% Japanese withholding tax on the
sale of a license in September 1997. In the quarter ended March 31, 1997, the
Company recorded an income tax expense of $18,000 which resulted in an income
tax provision of $68,000 for the nine month period ended March 31, 1997.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description
------ -----------
3.1(5) Restated Articles of Incorporation of
Registrant.
3.2(1) Amended and Restated Bylaws of Registrant.
10.1(1)(4) 1990 Stock Plan and Form of Option Agreement.
10.2(1) Form of Indemnification Agreement entered
into between the Company and each of its
directors and officers.
10.3(1) Lease Agreement, dated November 28, 1983,
between the Company and The Sobrato Group,
together with amendments thereto.
10.4(1)(2) License Agreement, dated September 23, 1991,
between the Company and Maxtor Corporation,
as amended.
10.5(1)(2) License Agreement, dated February 28, 1991,
between the Company and Fujitsu Limited, as
amended.
10.6(1)(2) Manufacturing License Agreement, dated
August 26, 1988, between the Company and
Denki Kagaku Kogyo Kabushiki Kaisha, as
amended.
10.7(1)(2) License Agreement, dated June 1, 1993,
between the Company and International
Business Machines Corporation.
10.8(1) Denka Promissory Note.
10.9(3) License Agreement, dated December 19, 1994,
between Hitachi, Ltd. and the Company.
10.10(5) License Agreement, dated June 19, 1995,
between Contact Recording Technology, Inc.
and the Company.
10.11(2) License Agreement, dated August 7, 1995,
between NEC Corporation and the Company.
10.12(6) Agreement for Purchase and Sale of Assets by
and between Read-Rite Corporation and the
Company.
10.13(2) License Agreement, dated August 12, 1996,
between Western Digital and the Company.
10.14(7) Assignment of Lease and Consent to
Assignment, dated July 2, 1996, between The
Sobrato Group, Censtor Corp. and Read-Rite
Corp.
10.15(7) Fifth Amendment to Manufacturing License
Agreement, dated February 22, 1996, with
Denki Kagaku Kogyo Kabushiki Kaisha.
10.16(7) Amendment to Terms of Debentures, dated
February 22, 1996, with Denki Kagaku Kogyo
Kabushiki Kaisha.
10.17(7) License Agreement, dated July 18, 1996,
between Read-Rite Corporation and the
Company.
10.18(8) Agreement between I.P. Managers, Inc. and
the Company dated July 31, 1997.
10.19(8) Incentive Compensation Agreement between the
Company and Sabine Austin, dated July 29,
1997.
10.20(9) License Agreement, dated September 25, 1997
between TDK Corporation and the Company.
27.1 Financial Data Schedule
----------
(1) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form 10 which became effective
December 25, 1994.
(2) Confidential Treatment requested for portions of Exhibit.
(3) Incorporated by reference to exhibits filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1994.
(4) Document indicated is a compensatory plan.
(5) Incorporated by reference to exhibits filed with Registrant's
Annual Report on Form 10-K for the year ended June 30, 1995.
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(6) Incorporated by reference to exhibit filed with Registrant's
Proxy Statement relating to the Registrant's 1996 Annual
Meeting of Shareholders.
(7) Incorporated by reference to exhibits filed with Registrant's
Annual Report on Form 10-K for the year ended June 30, 1996.
(8) Incorporated by reference to exhibits filed with Registrant's
Annual Report on Form 10-K for the year ended June 30, 1997.
(9) Incorporated by reference to exhibits filed with Registrant's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1997.
(b) Reports on Form 8-K.
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENSTOR CORP.
Registrant
BY: /s/ Sabine Austin
------------------------------------
Sabine Austin
President,
Chief Executive Officer and Principal
Financial Officer
Dated: May 6, 1998
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EXHIBIT INDEX
Exhibit
Number Description
------ -----------
3.1(5) Restated Articles of Incorporation of
Registrant.
3.2(1) Amended and Restated Bylaws of Registrant.
10.1(1)(4) 1990 Stock Plan and Form of Option Agreement.
10.2(1) Form of Indemnification Agreement entered
into between the Company and each of its
directors and officers.
10.3(1) Lease Agreement, dated November 28, 1983,
between the Company and The Sobrato Group,
together with amendments thereto.
10.4(1)(2) License Agreement, dated September 23, 1991,
between the Company and Maxtor Corporation,
as amended.
10.5(1)(2) License Agreement, dated February 28, 1991,
between the Company and Fujitsu Limited, as
amended.
10.6(1)(2) Manufacturing License Agreement, dated
August 26, 1988, between the Company and
Denki Kagaku Kogyo Kabushiki Kaisha, as
amended.
10.7(1)(2) License Agreement, dated June 1, 1993,
between the Company and International
Business Machines Corporation.
10.8(1) Denka Promissory Note.
10.9(3) License Agreement, dated December 19, 1994,
between Hitachi, Ltd. and the Company.
10.10(5) License Agreement, dated June 19, 1995,
between Contact Recording Technology, Inc.
and the Company.
10.11(2) License Agreement, dated August 7, 1995,
between NEC Corporation and the Company.
10.12(6) Agreement for Purchase and Sale of Assets by
and between Read-Rite Corporation and the
Company.
10.13(2) License Agreement, dated August 12, 1996,
between Western Digital and the Company.
10.14(7) Assignment of Lease and Consent to
Assignment, dated July 2, 1996, between The
Sobrato Group, Censtor Corp. and Read-Rite
Corp.
10.15(7) Fifth Amendment to Manufacturing License
Agreement, dated February 22, 1996, with
Denki Kagaku Kogyo Kabushiki Kaisha.
10.16(7) Amendment to Terms of Debentures, dated
February 22, 1996, with Denki Kagaku Kogyo
Kabushiki Kaisha.
10.17(7) License Agreement, dated July 18, 1996,
between Read-Rite Corporation and the
Company.
10.18(8) Agreement between I.P. Managers, Inc. and
the Company dated July 31, 1997.
10.19(8) Incentive Compensation Agreement between the
Company and Sabine Austin, dated July 29,
1997.
10.20(9) License Agreement, dated September 25, 1997
between TDK Corporation and the Company.
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
----------
(1) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form 10 which became effective
December 25, 1994.
(2) Confidential Treatment requested for portions of Exhibit.
(3) Incorporated by reference to exhibits filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1994.
(4) Document indicated is a compensatory plan.
(5) Incorporated by reference to exhibits filed with Registrant's
Annual Report on Form 10-K for the year ended June 30, 1995.
(6) Incorporated by reference to exhibit filed with Registrant's
Proxy Statement relating to the Registrant's 1996 Annual
Meeting of Shareholders.
(7) Incorporated by reference to exhibits filed with Registrant's
Annual Report on Form 10-K for the year ended June 30, 1996.
(8) Incorporated by reference to exhibits filed with Registrant's
Annual Report on Form 10-K for the year ended June 30, 1997.
(9) Incorporated by reference to exhibits filed with Registrant's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1997.